DEFINITION of Gann Angles
Gann angles are named after their creator W.D. Gann. They are regarded as a method of predicting price movements through the relation of geometric angles in charts depicting time and price. Gann was a 20th-century market theorist. Although his techniques have been largely disproven, his work helped lay the foundation for technical analysis and modeling financial derivatives.
BREAKING DOWN Gann Angles
The ideal balance between time and price exists when prices move identically to time, which occurs when the Gann angle is at 45 degrees. In total, there are nine different Gann angles that are important for identifying trend lines and market actions. When one of these trend lines is broken, the following angle will provide support or resistance.
More specifically, a Gann angle requires a straight line on a price chart, given a fixed relationship between time and price. According to Gann, the most important angle was a line representing one unit of price for one unit of time, now widely regarded as the 1x1 or the 45° angle. In this instance, the value of a commodity or stock which conforms to a 1x1 angle is said to increase by one point per day. The collection of Gann angles follows as 2x1 (moving up two points per day), 3x1, 4x1, 8x1, and 16x1. These movements are not limited to up moves; the angles for decreases in the price of a security apply just the same.
Gann Angles in the Stock Market
Students of financial markets will recognize the natural connection between Gann's angles and technical analysis methods for analyzing the stock market. In reality, the Gann angle approach contradicts the weak-form of the efficient market hypothesis, which concludes that past price movements cannot be used to forecast future price movements.
Applying Gann's angles to the market is not complicated. The application begins with tracking and waiting for tops and bottoms to form on a daily, weekly or monthly chart. Changes in these trends then allow for drawing an angle, hence, the Gann angle. When the trend is up, and the price stays in the space above an ascending angle without breaking below it, the market is regarded as strong; when the trend is down, and the price remains below a descending angle without breaking above it, the market is considered weak. Resulting in theory, the market revealing its relative strength or weakness based on the angle it is above or below.